By ADRIAN LOWCOCK 23/02/2010
This morning I joined a breakfast with Fidelity’s Anthony Bolton ahead of the launch of his new China Special Situations Investment Trust. This was an opportunity to hear, at first-hand, Bolton’s views on the attraction of investing in China and the approach he will take with the new trust.
Bolton believes that there are three key reasons why investors should consider China:-
“The economic recovery in the West will peter out”
Whilst China has been dependent on exports to the West, the country will be able to sustain high single digit growth despite weak growth in developed markets. As western economies weaken, the relative growth in China will look more attractive to investors. In 2008 China represented 7.1%1 of world Gross Domestic Product (GDP); this is expected to rise to 11.1% by 2014.
Whilst China is now the world’s 2nd largest economy on some measures, the stock market is currently only the world’s 9th largest. Anthony expects this to change, partly through growth, partly through new companies coming to the market, as well as a revaluation of the Renminbi which is currently pegged to the US dollar at an unsustainably low rate.
“China will benefit from a growing middle class”
There have been rising personal incomes in China for several years, accompanied by the emergence of a strong middle class. This growth in incomes has so far been focused very much on the Eastern, costal areas of China and a wide disparity persists between costal China and the interior.
The Chinese Government is focused on a huge expansion in infrastructure investment across the country with the aim of generating employment. This means there is potential for a substantial rise in rural incomes. Indeed, rural incomes have been growing at 14.5%2on an annual basis over the 5 years to December 2008.
As the population grows, higher income groups are likely to see their incomes increase faster than those in lower income groups. Therefore the growth in middle classes will be more pronounced and as a consequence spending on clothes and other retail items is set to rise significantly from what is currently a low base.
“Stockpicking with a value approach”
China fund managers have not been known for their stockpicking skills nor have they had to focus on a value approach to investing. So Bolton’s approach will be relatively new to the region. Bolton believes on the whole that the Chinese markets are fairly valued and in the case of domestic ‘A’ shares slightly overvalued. He’s clear that we have now seen the end of the ‘bargain phase’ when investors could expect to capture the high returns available from an emerging market, with export growth now firmly yesterday’s story.
However, with few fund managers focused on value-investing, Bolton believes that there are plenty of companies that remain undervalued and opportunities that have not been identified by the market. Some of these opportunities will be through companies with exposure to China but are listed on other markets such as the NASDAQ. Bolton will also have access to Fidelity’s own in-house Chinese venture capital business, which may provide the opportunity to participate in pre-IPO situations not normally available to external investors.
Bolton also gave some additional information on how he intends to structure his portfolio ahead of the formal publication of the prospectus.
Investment Approach
Bolton intends to run a relatively concentrated portfolio, ultimately investing in between 60 and 100 companies. Shortly after launch, the fund will achieve exposure to China using derivatives prior to switching funds into individual investments on a phased basis. Bolton also confirmed that up to 20% of the fund could be invested in companies listed outside of China.
The trust will also be able to borrow to magnify the returns available to shareholders. The Board has decided to limit the total gross exposure (by borrowing or derivatives) to 30% of the company’s net asset value, but Bolton expects this to be closer to 20% in the medium term.
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1IMF World economic outlook Oct 2009.
2NBS, IIFL Research 2007.